Main menu

Jump in land values following record crop prices

by Grant Gerlock

Listen to this story:

Grant Gerlock

March 14, 2011 - 7:00pm

Land prices in Nebraska are surging on the heels of record crop prices and a rosy estimate for farm income in the near future. A new report from the University of Nebraska Lincoln shows the average price of farmland jumping up to 25% in some parts of the state. In eastern Nebraska the average value of irrigated land has set a new high mark at $6,125/acre. That's a 27% increase from just over a year ago. NET News' Grant Gerlock talked to UNL Ag Economist Bruce Johnson to learn more about the report and why land values have soared so high, so fast.

GERLOCK: Let's start with some of the numbers you've been seeing. What's happening with land prices in Nebraska?

JOHNSON: As everybody is pretty much aware, they've been on an uptick. We show for the state as a whole about a 22% increase in average farmland value across the state in the last 12 months.

GERLOCK: Twenty-two percent in a year, that's pretty steep.

JOHNSON: That's very steep. We would have to go back into the early 1970s to see anything close to that in terms of a percentage increase.

GERLOCK: We've actually passed some thresholds that we've not seen before?

JOHNSON: Yeah. If we make adjustments for inflation and look at the value of today's real estate in real dollar terms, 2000 year dollars, we are at a new level inflation adjusted. Which tops where we were in basically 1980-1981 when we did have the boom which took us at that time to a very high peak.

GERLOCK: How do these numbers that you're seeing, the land values themselves, how does that compare to just say 5-10 years ago?

JOHNSON: Well we've, even going back 5 years from today, we have taken land values up pretty steadily in that time period. I would say I many areas, 70-90% increase in a 5 year period. Let's say we go back to 2006, 5 years back and let's say Dry Land in eastern Nebraska. By our numbers that dry land was right at $2,300/acre. As of February 1st of this year, we're right at $4,000/acre.

GERLOCK: And that's Dry Land, so if it's irrigated that actually adds to the value, right?

JOHNSON: Well, it certainly does in terms of dollars, but dollars in 2006 on center-pivot irrigated land in eastern Nebraska was around $3,200/acre. Presently, we're at about $6,200/acre.

GERLOCK: That's a pretty good increase.

JOHNSON: Very much.

GERLOCK: Why is it going up so fast?

JOHNSON: Behind all of it is, really, an uptick, an increase in earnings coming off the land, and for good reasons. Commodity prices, crop commodity prices, we know are at all time highs. And this has been going on, somewhat up and down, for the last 3-4 years. And so land is an income producing asset and so that's the major driver.

GERLOCK: They're making more money, and so it's selling for more money.

JOHNSON: That's right, and you know people that are buying it realize, okay, I can get a reasonable rate of return on this kind of investment. And given alternatives in today's world, those alternative investments don't give you a very high return.

GERLOCK: When is the last time we saw land prices jump like this?

JOHNSON: We would have to go back to the mid-1970s. We did see quite a run up in the 1970s for a variety of reasons. Again, international grain conditions and shortages and so forth. And we actually went into a boom that took us right up until basically 1980, then we took it back down.

GERLOCK: Things really went for a dive in the 1980s and land prices fell at that time as well?

JOHNSON: Yes they did. We call those the Willie Nelson years, with Farm Aid. Yes.

GERLOCK: So is there a cautionary note here in the numbers you're seeing now in 2011? Is this a bubble that could burst down the road?

JOHNSON: We would probably say for sure there can be some air taken out of the bubble. Having it burst? The fundamentals look pretty solid. That's pretty unlikely. No question about it. If we would even see a removal of the Blender's Credit on ethanol and a rising value of the dollar on exchange rates which would reduce exports, these things would factor back and probably take down returns to land across this part of the country and in turn values.

GERLOCK: When the price of oil jumps one thing we always seem to hear about is speculation, investors coming into the market and kind of pumping up the price. Are there speculators in the land market?

JOHNSON: There is some of that but at the present time there are some pretty solid conditions, what we would say, the fundamentals are pretty solid. The income basis is there in the relatively short run. And as people look into the long term at investment we will someday have to feed 9 plus billion people in the not too distant future when we're less than 7 billion today, and the demand for agricultural products coming out of this part of the country will probably show a pretty significant increase. Albeit up and down short run kinds of adjustments.

GERLOCK: Is this something to really feel good about? Is there a downside to seeing prices go up like this?

JOHNSON: Well, certainly as a landowner this looks really good in your portfolio. If we put 22% on your value of the agricultural real estate that you own, you're be excited about that. It's no question. We've in a sense added about $14 billion worth of wealth to Nebraska's land holding folk in the last 12 months. And over the last 5 years we've added about over $30 billion worth of value of agriculture real estate. And so certainly as a landowner I would feel good about that and our balance sheet would look much better.

GERLOCK: Who looks at these numbers and gets a bad feeling?

JOHNSON: It's the wanna be owners who would certainly say I wish would have had an opportunity to invest in land earlier or for whatever. And there are. There are people who would like to acquire land and it's very, very limited in terms of availability right now. Because the very same reasons that people want it are the very same reasons that people who own it now want to continue to hold it.

GERLOCK: For instance, a young farmer. This raises the bar a little higher.

JOHNSON: It does raise the bar a little higher. But younger farmers do have some opportunity if they manage well and work at it to rent land and maybe down the road a ways acquire it, at lease a portion of the land they operate. But the day of having to own land to farm and enter farming, that's past. It's through arrangements and leasing land, and farming efficiently and profitably that's the entry track these days.

GERLOCK: Can these prices go higher? Do you expect them to go higher?

JOHNSON: Well, right now we would say it's a function of what happens down the road. 2011 appears to be a real solid year income wise for crop producers across the state and other parts of the country. And for the near term it looks pretty solid. Given the volatility in the world markets and that sort of thing what 2012 and thereafter would look like, most likely it won't be as solid as this year looks income wise. If anything there's more risk that goes with the turf. These are going to need to be factored in before we assume that it's forever at this level and going upward. If anything we've probably reached maybe a new plateau in terms of the value of agricultural land across the Midwestern part of the U.S. And for the most part that's pretty solid. But it will probably not turn out to be what we saw in the 1980s because it's a different ballgame.

GERLOCK: What could happen that would bring prices down?

JOHNSON: No question our world economy, and we are tied into a global economy, is very vulnerable to all kinds of situations. And we may find again as the dollar begins to move in different directions, instead of growing more and more cheap relative to other currencies, that this would really slow agricultural exports and kind of come together to create some real dilemmas. Of course a strengthening dollar goes with rising interest rates on borrowed money, and so multiple things could lead to some adjustment down the road on values and with associated returns and rents.